Causes Behind Bitcoin’s Price Volatility

The fluctuations in Bitcoin’s spot price on trading exchanges are driven by a multitude of factors. In traditional markets, volatility is measured by the Volatility Index, such as the CBOE Volatility Index (VIX). However, the world of cryptocurrency, particularly Bitcoin, is still in its nascent stages, lacking a universally accepted volatility index. Nevertheless, it is well-established that Bitcoin exhibits significant volatility, often undergoing 10x changes in price compared to the US dollar within a relatively short timeframe. Here are several key factors contributing to Bitcoin’s volatility:

1. Impact of Negative Press

Bitcoin’s price is susceptible to the influence of negative press, especially news events that evoke concerns among Bitcoin users. Geopolitical incidents and statements by government authorities hinting at potential regulation of Bitcoin can trigger market fluctuations. Historical events like the Mt. Gox bankruptcy in 2014 and the more recent South Korean exchange Yapian Youbit’s demise, along with high-profile incidents like Bitcoin’s involvement in Silk Road’s illegal activities, have caused panic among investors, resulting in rapid declines in Bitcoin’s value. However, resilient Bitcoin investors often view such events as indicators of market growth, leading to a subsequent increase in Bitcoin’s value against fiat currencies.

2. Bitcoin’s Perceived Value Changes

One reason for Bitcoin’s volatility against fiat currencies is its perceived store of value compared to traditional currencies. Bitcoin shares similarities with gold, as it is designed to have a capped supply of 21 million BTC. This contrasts with fiat currencies controlled by government authorities aiming for low inflation, high employment, and stable economic growth. As economic conditions evolve, investors may reallocate their assets, contributing to Bitcoin’s price fluctuations.

3. Disparity in Perception of Bitcoin’s Store of Value and Method of Value Transfer

Bitcoin’s volatility is further fueled by varying perceptions of its implicit value as a store of value and a method of value transfer. A store of value is an asset’s ability to be valuable in the future with some predictability, while a method of value transfer is the concept used to transfer assets from one entity to another. Bitcoin’s current volatility makes it a somewhat uncertain store of value, but its capability for seamless value transfer is well-established. As these drivers differ from traditional fiat currencies, Bitcoin’s value can shift significantly in response to news events, akin to fluctuations observed in fiat stock markets.

In essence, Bitcoin’s price volatility is a complex interplay of negative press influence, perceived value changes, and varying understandings of its role as a store of value and method of value transfer. Understanding these dynamics is crucial for navigating the volatile landscape of cryptocurrency investments.